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Alternative fees ought to target desired outcomes, and in proportion to their odds

To craft a fee arrangement that makes a difference, law department managers needs to think hard not only about the outcomes they seek in a matter but also the likelihood of achieving those outcomes. Bonuses for the law firm that achieves a particular goal, such as a resolution of a case before substantial discovery begins or completion of a transaction by a certain date, need to be in line with that probability.

If there’s reason to believe that the odds of that outcome are less than one in four (25 percent or less) a bonus might be sizeable, such as up to 50 percent of fees billed. Whereas, if the company is likely to prevail substantially on a motion for summary judgment or complete the zoning approval by the year end, the bonus for that success ought to be negligible. Whether or not, the bonus as percentage of fees is not the only standard. An absolute dollar amount might also work its charms.

In other words, don’t promise a bonus for the inevitable; reward outcomes that on the probabilities known at the start are exceptional.

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One response to “Alternative fees ought to target desired outcomes, and in proportion to their odds”

  1. Cole says:

    Interesting note. And it does bring to light some of the basic economics of incentives. By design, incentives change both behavior and the prioritization of tasks. However, these shifts rarely occur in a vacuum (despite the classical economist’s view, nothing is ever held ‘constant’ and all things are never ‘held equal’). People are both finite and creative; meaning that the individuals offering incentives are often unable to predict all of the ways that people will respond to them.
    It is important to take a holistic view when utilizing alternative fees for outside counsel. To the extent that these incentive models are used to drive to business goals, it becomes necessary to assess the potential for ripple effects. These incentives will undoubtedly have an impact on not only the matter to which the incentive is tied, but also to other matters that a particular firm may be currently assigned. It is important to ensure that what originally appeared to be a goal-aligning incentive does not become myopic and result in unintended consequences.